If Canada’s social model is to survive, policymakers have to pushback against rising income inequality, according to a new report from TD Economics.
TD notes that while income inequality in Canada is much lower than in the United States, and the increase in inequality in recent years has been less severe north of the border, Canada has still experienced a significant rise in inequality over the past several decades. And, it says that “a number of trends suggest that income inequality may rise higher, and social mobility could decline, in the years ahead.”
For one thing, it notes that the commodity and housing booms have prevented greater hollowing out of Canada’s middle class in recent years. “Excluding these and related sectors, Canada’s middle skill jobs have been under considerable pressure. And, commodity and real estate booms do not last forever,” it says.
Another challenge for Canada is the fact that the U.S., its major trading partner and competitor for talent, allows much higher income inequality, TD says. “America is willing to pay their low income earners less and their high income earners more than in Canada.”
“The combination of stronger productivity growth and lower compensation in the United States has led to a dramatic drop in U.S. unit labour costs relative to those in Canada. And, the outlook for continued modest economic growth could create pressures fostering greater income inequality in both Canada and the United States,” it says.
Indeed, TD says that Canada is “at a cross roads” as it faces the prospect of higher income inequality and reduced social mobility. “If Canada is to retain its economic and social model, policymakers are likely going to have to lean more against rising inequality,” it says.
The good news, TD says, is that there is scope for policymakers to combat inequality. And, it says that these policies do not have to negatively impact economic growth. In fact, it says they can actually support long-term growth.
The report notes that governments can help remove barriers to lower-income workers, by boosting workers’ skills, and making the tax and transfer system more progressive and redistributive. “The main goals for Canada must be to find ways to enhance productivity, thereby boosting the income pie to be split between capital and labour, while also putting in place policies that encourage just income outcomes and facilitate social mobility,” it says.
“The goal is to have rising income with fair distribution, a necessary condition for which is a productive and competitive economy. The requisite policy leaning likely requires a mixed approach involving direct and indirect efforts to influence market incomes, combined with a progressive tax system and an effective transfer system that limits negative distortions on the economy,” it concludes. “The challenge for Canada is to maintain its economic and social model in a world of growing inequality; and, this requires more consideration of income inequality implications when making policy decisions.”